Quarterly report pursuant to Section 13 or 15(d)

Equity and Long-Term Incentive Compensation Plans

v2.4.0.8
Equity and Long-Term Incentive Compensation Plans
 9 Months Ended
Mar. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Equity and Long-Term Incentive Compensation Plans
EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS
Equity Incentive Program
Under the Company’s current equity incentive program, the Company issues equity awards from its 2004 Equity Incentive Plan (the “2004 Plan”), which provides for the grant of options to purchase shares of its common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to its employees, consultants and members of its Board of Directors. The 2004 Plan currently permits the issuance of up to 34.9 million shares of common stock, including 2.9 million additional shares approved by the Company's stockholders on November 6, 2013. Any 2004 Plan awards of restricted stock units, performance shares, performance units or deferred stock units with a per share or unit purchase price lower than 100% of fair market value on the grant date are counted against the total number of shares issuable under the 2004 Plan as follows, based on the grant date of the applicable award: (a) for any such awards granted before November 6, 2013, the awards counted against the 2004 Plan share reserve as 1.8 shares for every one share subject thereto; and (b) for any such awards granted on or after November 6, 2013, the awards count against the 2004 Plan share reserve as 2.0 shares for every one share subject thereto.
The following table summarizes the combined activity under the Company's equity incentive plans for the indicated period:
(In thousands)
Available
For Grant
Balances as of June 30, 2013(1)
6,696

Plan shares increased
2,900

Restricted stock units granted(2)(3)
(1,267
)
Restricted stock units canceled(2)
422

Options canceled/expired/forfeited
57

Plan shares expired(4)
(48
)
Balances as of March 31, 2014(1)
8,760


__________________ 
(1)
Includes shares available for issuance under the 2004 Plan, as well as under the Company’s 1998 Outside Director Option Plan (the “Outside Director Plan”), which only permits the issuance of stock options to the Company’s non-employee members of the Board of Directors. As of March 31, 2014, 1.7 million shares were available for grant under the Outside Director Plan.
(2)
The number of restricted stock units provided in this row reflects the application of the full value award multiplier described above (1.8x or 2.0x depending on the grant date of the applicable award).
(3)
Includes 0.3 million (reflected as 0.6 million shares in this table due to the application of the 1.8x multiple described above, as all of these awards were granted before November 6, 2013) restricted stock units granted to senior management during the nine months ended March 31, 2014 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during the nine months ended March 31, 2014, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
(4)
Represents the portion of shares listed as “Options canceled/expired/forfeited” above that were issued under the Company’s equity incentive plans other than the 2004 Plan or the Outside Director Plan. Because the Company is only currently authorized to issue equity awards under the 2004 Plan and the Outside Director Plan, any equity awards that are canceled, expire or are forfeited under any other Company equity incentive plans do not result in additional shares being available to the Company for future grant.
Except for stock options granted to non-employee Board members as part of their regular compensation package for service through the end of the first quarter of fiscal year 2008, the Company has granted only restricted stock units under its equity incentive program since September 2006. For the preceding several years until September 30, 2006, stock options were granted at the market price of the Company’s common stock on the date of grant (except for the previously disclosed retroactively priced options which were granted primarily prior to the fiscal year ended June 30, 2002), generally with a vesting period of five years and an exercise period not to exceed seven years (ten years for options granted prior to July 1, 2005) from the date of issuance. Restricted stock units may be granted with varying criteria such as service-based and/or performance-based vesting.
The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. The fair value is determined using a Black-Scholes valuation model for purchase rights under the Company’s Employee Stock Purchase Plan and using the closing price of the Company’s common stock on the grant date for restricted stock units, adjusted to exclude the present value of dividends which do not accrue on restricted stock units granted by the Company to date. In November 2013, the Company's stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant "dividend equivalent" rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units, which represent the right to receive cash in lieu of dividends on such awards once the underlying awards vest. As of March 31, 2014, the Company had not granted dividend equivalent rights in connection with any such awards.
The following table shows pre-tax stock-based compensation expense for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Stock-based compensation expense by:
 
 
 
 
 
 
 
Costs of revenues
$
1,688

 
$
2,912

 
$
7,186

 
$
8,811

Engineering, research and development
3,512

 
5,068

 
12,797

 
14,801

Selling, general and administrative
7,523

 
10,556

 
26,829

 
28,866

Total stock-based compensation expense
$
12,723

 
$
18,536

 
$
46,812

 
$
52,478



The following table shows stock-based compensation capitalized as inventory as of the dates indicated below: 
(In thousands)
As of
March 31, 2014
 
As of
June 30, 2013
Inventory
$
8,524

 
$
8,098


Stock Options
The following table summarizes the activity and weighted-average exercise price for stock options under all plans during the nine months ended March 31, 2014: 
Stock Options
Shares
(In thousands)
 
Weighted-Average
Exercise Price
Outstanding stock options as of June 30, 2013
1,663

 
$
48.97

Granted
—

 
$
—

Exercised
(1,389
)
 
$
50.09

Canceled/expired/forfeited
(57
)
 
$
53.16

Outstanding stock options as of March 31, 2014 (all outstanding and all vested and exercisable)
217

 
$
40.72


The Company has not issued any stock options since November 1, 2007. The weighted-average remaining contractual terms for total options outstanding under all plans, and for total options vested and exercisable under all plans, as of March 31, 2014 were each 0.5 years. The aggregate intrinsic values for total options outstanding under all plans, and for total options vested and exercisable under all plans, as of March 31, 2014 were each $6.2 million.
The authoritative guidance on stock-based compensation permits companies to select the option-pricing model used to estimate the fair value of their stock-based compensation awards. The Black-Scholes option-pricing model requires the input of assumptions, including the option’s expected term and the expected price volatility of the underlying stock. For purposes of the fair value estimates presented in this report, the Company has based its expected stock price volatility assumption on the market-based implied volatility from traded options of the Company’s common stock. As of March 31, 2014, the Company had no unrecognized stock-based compensation balance related to stock options.
The following table shows the total intrinsic value of options exercised, total cash received from employees and non-employee Board members as a result of stock option exercises and tax benefits realized by the Company in connection with these stock option exercises for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Total intrinsic value of options exercised
$
4,626

 
$
8,462

 
$
15,940

 
$
13,236

Total cash received from employees and non-employee Board members as a result of stock option exercises
$
13,334

 
$
48,685

 
$
70,065

 
$
75,403

Tax benefits realized by the Company in connection with these exercises
$
1,147

 
$
2,872

 
$
4,825

 
$
4,451

The Company generally settles employee stock option exercises with newly issued common shares, except in certain tax jurisdictions where settling such exercises with treasury shares provides the Company or one of its subsidiaries with a tax benefit.

Restricted Stock Units
The following table shows the applicable number of restricted stock units and weighted-average grant date fair value for restricted stock units granted, vested and released, withheld for taxes, and forfeited during the nine months ended March 31, 2014 and restricted stock units outstanding as of March 31, 2014 and June 30, 2013: 
Restricted Stock Units
Shares
(In thousands) (1)
 
Weighted-Average
Grant Date
Fair Value
Outstanding restricted stock units as of June 30, 2013(2)
5,374

 
$
34.39

Granted(3)
702

 
$
53.28

Vested and released
(1,576
)
 
$
33.20

Withheld for taxes
(864
)
 
$
33.20

Forfeited
(236
)
 
$
37.53

Outstanding restricted stock units as of March 31, 2014(2) (3)
3,400

 
$
38.93

__________________ 
(1)
Share numbers reflect actual shares subject to awarded restricted stock units. As described above, under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either 1.8 or 2.0 (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.
(2)
Includes 0.3 million restricted stock units granted to senior management during the nine months ended March 31, 2013 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
(3)
Includes 0.3 million restricted stock units granted to senior management during the nine months ended March 31, 2014 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2014, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.
The restricted stock units granted by the Company since the beginning of the fiscal year ended June 30, 2013 generally vest (a) with respect to awards with only service-based vesting criteria, in four equal installments on the first, second, third and fourth anniversaries of the grant date and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date, in each case subject to the recipient remaining employed by the Company as of the applicable vesting date. The restricted stock units granted by the Company from the beginning of the fiscal year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on the second and fourth anniversaries of the grant date, subject to the recipient remaining employed by the Company as of the applicable vesting date. The fair value is determined using the closing price of the Company’s common stock on the grant date for restricted stock units, adjusted to exclude the present value of dividends which do not accrue on restricted stock units granted by the Company to date. In November 2013, the Company's stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant "dividend equivalent" rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units, which represent the right to receive cash in lieu of dividends on such awards once the underlying awards vest. As of March 31, 2014, the Company had not granted dividend equivalent rights in connection with any such awards.
The restricted stock units have been awarded under the 2004 Plan, and each unit will entitle the recipient to one share of the Company's common stock when the applicable vesting requirements for that unit are satisfied. However, for each share actually issued under the awarded restricted stock units, the share reserve under the 2004 Plan will be reduced by 1.8 shares (for awards granted before November 6, 2013) or 2.0 shares (for awards granted on or after November 6, 2013), as provided under the terms of the 2004 Plan.

The following table shows the weighted-average grant date fair value per unit for the restricted stock units granted and tax benefits realized by the Company in connection with vested and released restricted stock units for the indicated periods: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
(In thousands, except for weighted-average grant date fair value)
2014
 
2013
 
2014
 
2013
Weighted-average grant date fair value per unit
$
56.48

 
$
51.95

 
$
53.28

 
$
47.71

Tax benefits realized by the Company in connection with vested and released restricted stock units
$
1,793

 
$
747

 
$
43,884

 
$
28,771


As of March 31, 2014, the unrecognized stock-based compensation expense balance related to restricted stock units was $88.2 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.4 years. The intrinsic value of outstanding restricted stock units as of March 31, 2014 was $235.1 million.
Cash-Based Long-Term Incentive Compensation
Starting in fiscal year 2013, the Company adopted a cash-based long-term incentive program for many of its employees as part of the Company's employee compensation program. During the nine months ended March 31, 2014, the Company approved cash-based long-term incentive (“Cash LTI”) awards of $65.3 million under the Company's Cash Long-Term Incentive Plan (“Cash LTI Plan”). Cash LTI awards issued to employees under the Cash LTI Plan will vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Executives and non-employee Board members are not participating in this program. During the three months ended March 31, 2014 and 2013, the Company recognized $7.3 million and $3.6 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2014 and 2013, the Company recognized $18.7 million and $7.1 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2014, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $93.7 million.
Employee Stock Purchase Plan
KLA-Tencor’s Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 10% of their eligible earnings toward the semi-annual purchase of KLA-Tencor’s common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
Effective January 1, 2010, the offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date.
The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model. The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions: 
 
Three months ended
March 31,
 
Nine months ended
March 31,
 
2014
 
2013
 
2014
 
2013
Stock purchase plan:
 
 
 
 
 
 
 
Expected stock price volatility
25.8
%
 
27.5
%
 
27.5
%
 
28.9
%
Risk-free interest rate
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
Dividend yield
2.8
%
 
3.2
%
 
2.9
%
 
3.3
%
Expected life of options (in years)
0.5

 
0.5

 
0.5

 
0.5



 The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods: 
(In thousands, except for weighted-average fair value per share)
Three months ended
March 31,
 
Nine months ended
March 31,
2014
 
2013
 
2014
 
2013
Total cash received from employees for the issuance of shares under the ESPP
$
—

 
$
—

 
$
22,035

 
$
20,139

Number of shares purchased by employees through the ESPP
—

 
—

 
469

 
496

Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP
$
1,150

 
$
724

 
$
2,023

 
$
1,398

Weighted-average fair value per share based on Black-Scholes model
$
13.04

 
$
10.36

 
$
12.29

 
$
10.46


The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal year. As of March 31, 2014, after giving effect to the ESPP purchase that occurred on such date, a total of 1.2 million shares were reserved and available for issuance under the ESPP. As of the date of this report, no additional shares have been added to the ESPP with respect to the fiscal year ending June 30, 2014